Prof. Skelton says ' If you don’t have credible evidence of a long-term inflation problem, then you don’t have a long-term debt problem." Currently inflation trending down so maybe the Fed. Resv. Discount Rate is having no discernible market effect. Question: how has lending been affected?
When I see this, it terrifies me. The interest income channel as the primary driver of new money infusions to offset a lack of fiscal... this feels like Friedman lite as a return to mometarist thinking
The Fed seems like the rider of a bicycle whose wheels turn only after a considerable time lag from the weight shift and the turn of the handlebars (changes in interest rates). Bicyclists know it's next to impossible to keep the bicycle (economy) stable unless the lag is constant, and the roadway is very flat/hazard-free (even then it requires lots of practice!). A real-world economy is not like that. There is always the unpredictable bump. And the time lags from handlebar to wheel are apt to vary from one cycle to the next.
In short, how do we know that the Fed isn't just making the business cycle worse?
And what would happen if Treasury stopped paying interest on its debt (at least new debt), which Stephanie has said (previously) it can legally do? This would move us to permanent ZIRP on Fed funds (?) and near-ZIRP on short term Treasury securities. Would the fiscal time lags shorten? Would private investment flows stabilize? Would the bike balance better, overall? Perhaps this would encourage more private investment in riskier brick and mortar than in fiat paper; take away an incentive for trade and fiscal deficits; and restore the primacy of fiscal policy. But would it be a good thing (on balance)? Wouldn't it force Congress to do its (fiscal) job?
Please write an article on what happens and why when attempts are made to balance the budget. IMO, what Trump proposes is very inflationary. Also, I am concerned that most people don't realize money for Ukraine (and maybe Israel) winds up being spent in the American south at munitions factories. There is a reason that war is considered good for an economy.
I can't think of a more punishing economic policy to the middle class than the one we have now. We are giving away trillions in interest income to Bondholders (upper income for the most part) while making it impossible for an average family to buy a home. We have low taxes and high rates but what we need is lower rates and higher taxes.
We need to show how MMT works in accounting terms with 2 columns Govt and Private for both P&L and Bal Sheet... unfortunately the formatting is different in the edit mode... so it may not seem clear as posted :(
INCOME AND EXPENDITURE
Government ----> Private Sector
New Money Created ----> New Money Received
(to pay Expenses) ----> (as Income for Goods and Services Supplied
and as Grants and Welfare)
(Government Spending adds to Money in Circulation)
LESS LESS
Taxes Collected <---- Taxes Paid
(Public Income) <---- (Private Expense)
(Government Taxes reduce Money in Circulation)
Assuming Taxes are Less than Spending:
| |
\/ \/
Net Result: Deficit = Net New Money Left in Circulation
(This Net New Money drives extra economic activity as it is spent by the government directly, and by welfare and grant recipients to meet their needs)
| |
\/ \/
BALANCE SHEET
Government = Private Sector
Add Deficit to = Add Net Receipts to
Money on Issue (LIABILITIES) = Cash on Hand (ASSETS)
THEN
Government SELLS BONDS = Private Sector BUYS BONDS
(The purpose of issuing bonds is NOT to finance Government Spending, but to remove
Money from the economy, and to provide a risk-free income to investors)
| |
\/ \/
Increases Cash on Hand * <---- Reduces Cash on Hand
(Increases ASSETS) <---- (Reduces ASSETS)
| |
\/ \/
Balanced by = Balanced by
Increase in LIABILITIES (Bonds) = Increase in ASSETS (Bonds)
Increases DEBT CLOCK = Increases ASSET CLOCK
| |
\/ \/
SELLING BONDS HAS ...... BUYING BONDS HAS
ZERO IMPACT ON NET ASSETS ....... ZERO IMPACT ON NET ASSETS
As illustrated, all the focus on the Government ‘Debt Clock’ (the money it owes on bonds) fails to recognise that it is matched by the Private Sector ‘Asset Clock’.
It also fails to recognise that, as a result of selling the bonds, the Government retains the cash it receives. This cash can sit on its Balance Sheet until the time comes to repay the bonds. Repayment is therefore never in doubt. Nor does it require any sacrifice by future generations. The entries are simply reversed: the cash goes down along with the liability for the bonds (as they are repaid).
If in the next year, the Government continues to run a deficit, the deficit again adds to the money supply, without any change in the level of debt. The debt only goes up if the Government sells bonds to take some money out of the economy. Again, receiving cash that it can hold against repayment upon maturity.
This should eliminate any concern that 'future generations' will have to repay 'our' debts.
Nor does Government borrowing ‘crowd out’ private sector borrowing. A private individual or corporation is always able to go to a bank and get a loan based on their own creditworthiness and interest rates at the time. The bank does not have to find the money to make the loan. Like the Govt. it just makes the necessary entries in its books: Debit Loan and Credit Deposit. The double entry keeps the banks books in balance. The Debit records the amount owed, and the Debit provides the funds for the borrower to draw down. Money at the stroke of key.
The level of Government Debt, has no bearing at all on interest rates. This is clear from the 40-year climb in debt, matched by a 40-year fall in interest rates since the 1980’s. This could not occur if Government Borrowing ‘crowded out’ Private Borrowing.
While bonds attract interest, the money to pay the interest can be created, just the same as for all Government spending. In fact, there is no need to issue bonds at all, except to provide a guaranteed income for the bond holders, who would otherwise have to hold their cash or invest it elsewhere.
Most of the interest paid gets reinvested, so it has little impact on demand for goods and services, and hence inflation in consumer prices.
Prof. Skelton says ' If you don’t have credible evidence of a long-term inflation problem, then you don’t have a long-term debt problem." Currently inflation trending down so maybe the Fed. Resv. Discount Rate is having no discernible market effect. Question: how has lending been affected?
When I see this, it terrifies me. The interest income channel as the primary driver of new money infusions to offset a lack of fiscal... this feels like Friedman lite as a return to mometarist thinking
The Fed seems like the rider of a bicycle whose wheels turn only after a considerable time lag from the weight shift and the turn of the handlebars (changes in interest rates). Bicyclists know it's next to impossible to keep the bicycle (economy) stable unless the lag is constant, and the roadway is very flat/hazard-free (even then it requires lots of practice!). A real-world economy is not like that. There is always the unpredictable bump. And the time lags from handlebar to wheel are apt to vary from one cycle to the next.
In short, how do we know that the Fed isn't just making the business cycle worse?
And what would happen if Treasury stopped paying interest on its debt (at least new debt), which Stephanie has said (previously) it can legally do? This would move us to permanent ZIRP on Fed funds (?) and near-ZIRP on short term Treasury securities. Would the fiscal time lags shorten? Would private investment flows stabilize? Would the bike balance better, overall? Perhaps this would encourage more private investment in riskier brick and mortar than in fiat paper; take away an incentive for trade and fiscal deficits; and restore the primacy of fiscal policy. But would it be a good thing (on balance)? Wouldn't it force Congress to do its (fiscal) job?
Please write an article on what happens and why when attempts are made to balance the budget. IMO, what Trump proposes is very inflationary. Also, I am concerned that most people don't realize money for Ukraine (and maybe Israel) winds up being spent in the American south at munitions factories. There is a reason that war is considered good for an economy.
I can't think of a more punishing economic policy to the middle class than the one we have now. We are giving away trillions in interest income to Bondholders (upper income for the most part) while making it impossible for an average family to buy a home. We have low taxes and high rates but what we need is lower rates and higher taxes.
We need to show how MMT works in accounting terms with 2 columns Govt and Private for both P&L and Bal Sheet... unfortunately the formatting is different in the edit mode... so it may not seem clear as posted :(
INCOME AND EXPENDITURE
Government ----> Private Sector
New Money Created ----> New Money Received
(to pay Expenses) ----> (as Income for Goods and Services Supplied
and as Grants and Welfare)
(Government Spending adds to Money in Circulation)
LESS LESS
Taxes Collected <---- Taxes Paid
(Public Income) <---- (Private Expense)
(Government Taxes reduce Money in Circulation)
Assuming Taxes are Less than Spending:
| |
\/ \/
Net Result: Deficit = Net New Money Left in Circulation
(This Net New Money drives extra economic activity as it is spent by the government directly, and by welfare and grant recipients to meet their needs)
| |
\/ \/
BALANCE SHEET
Government = Private Sector
Add Deficit to = Add Net Receipts to
Money on Issue (LIABILITIES) = Cash on Hand (ASSETS)
THEN
Government SELLS BONDS = Private Sector BUYS BONDS
(The purpose of issuing bonds is NOT to finance Government Spending, but to remove
Money from the economy, and to provide a risk-free income to investors)
| |
\/ \/
Increases Cash on Hand * <---- Reduces Cash on Hand
(Increases ASSETS) <---- (Reduces ASSETS)
| |
\/ \/
Balanced by = Balanced by
Increase in LIABILITIES (Bonds) = Increase in ASSETS (Bonds)
Increases DEBT CLOCK = Increases ASSET CLOCK
| |
\/ \/
SELLING BONDS HAS ...... BUYING BONDS HAS
ZERO IMPACT ON NET ASSETS ....... ZERO IMPACT ON NET ASSETS
As illustrated, all the focus on the Government ‘Debt Clock’ (the money it owes on bonds) fails to recognise that it is matched by the Private Sector ‘Asset Clock’.
It also fails to recognise that, as a result of selling the bonds, the Government retains the cash it receives. This cash can sit on its Balance Sheet until the time comes to repay the bonds. Repayment is therefore never in doubt. Nor does it require any sacrifice by future generations. The entries are simply reversed: the cash goes down along with the liability for the bonds (as they are repaid).
If in the next year, the Government continues to run a deficit, the deficit again adds to the money supply, without any change in the level of debt. The debt only goes up if the Government sells bonds to take some money out of the economy. Again, receiving cash that it can hold against repayment upon maturity.
This should eliminate any concern that 'future generations' will have to repay 'our' debts.
Nor does Government borrowing ‘crowd out’ private sector borrowing. A private individual or corporation is always able to go to a bank and get a loan based on their own creditworthiness and interest rates at the time. The bank does not have to find the money to make the loan. Like the Govt. it just makes the necessary entries in its books: Debit Loan and Credit Deposit. The double entry keeps the banks books in balance. The Debit records the amount owed, and the Debit provides the funds for the borrower to draw down. Money at the stroke of key.
The level of Government Debt, has no bearing at all on interest rates. This is clear from the 40-year climb in debt, matched by a 40-year fall in interest rates since the 1980’s. This could not occur if Government Borrowing ‘crowded out’ Private Borrowing.
While bonds attract interest, the money to pay the interest can be created, just the same as for all Government spending. In fact, there is no need to issue bonds at all, except to provide a guaranteed income for the bond holders, who would otherwise have to hold their cash or invest it elsewhere.
Most of the interest paid gets reinvested, so it has little impact on demand for goods and services, and hence inflation in consumer prices.